Board says USP Group can continue as going concern, despite auditors' red flags

SINGAPORE (Sept 16): USP Group, the trader of oil and marine equipment as well as property developer, is expected to continue as a going concern, says its board in an early Saturday morning filing.

This is despite independent auditors RSM Chio Lim, highlighting an emphasis of matter on a material uncertainty in the group's FY19 financial results, which may cast doubt on its ability to continue as a going concern.

USP has been placed in the Singapore Exchange Watch-list since June 5, 2017 after failing the minimum 20-cent trading price rule, and has until June 4, 2020 to get itself out of the Watch-list.

RSM had raised USP’s ability to continue as a viable concern after the group incurred a net loss of $23 million for FY19 ended March 31, compared with a profit of $47,000 in FY18. As at end March, cash and cash equivalents also stood at a negative $1 million as at end March. The group’s total current liabilities also exceeded total current assets by $15.5 million.

USP's non-current bank loans were classified as current liabilities after certain subsidiaries breached their loan agreements when the company, as corporate guarantor of its subsidiaries' loans, did not fulfil the requirement to maintain a minimum consolidated tangible net worth of $40 million.

However, USP’s board believes it is able to continue as a going concern as it is in the process of disposing its subsidiary, Biofuel Research, for a cash consideration of $5.6 million.

The group had also received from the purchaser the deposit and first tranche payments of $0.1 million and $1.4 million on May 24 and June 18, respectively.

The definitive sale and purchase agreement has been entered between USP and buyer AJ Jetting on Aug 7 and management expects the disposal to be completed within six months from then.

Furthermore, the group had obtained written confirmations from the bank on June 27, to which the latter has agreed to accommodate the breach of loan covenants on a one-off basis for FY19. Hence, management expects the bank will not request for immediate loan repayment even though there was a breach.

“Had it not been for the breach of the loan covenants and the resultant classification of non-current bank loans to current liabilities, the group's total current assets would have exceeded total current liabilities by $9,202,000,” says USP’s board in the Saturday filing.

Apart from the group’s divestment and extended loan repayment, the group is confident that sales proceeds from an unspecified development property will be obtained within 12 months from the reporting year ended March 31; it is able to generate sufficient cash flows from its operating activities to support operating expenditure in the same period; and it is actively seeking additional external equity financing from new investors.

In 1Q20 ended June, USP reported a loss of $634,000, compared to earnings of $149,000 in 1Q19, while revenue for the period fell 6% to $9.1 million.

Year to date, shares in USP are down about 39% at 4.3 cents.